Is Guanxi on the Way Out of Chinese Negotiation? Part 1 of 2

The Good and Bad Aspects of Chinese Guanxi

As the Chinese economy develops and grows increasingly international, will traditional Chinese business customs like guanxi become less important? Since returning to the US and talking to American businesspeople about negotiating deals in China that question has come up several times — though more often than not it’s more an assertion or hopeful statement rather than a genuine question.

Is guanxi on the wane in Chinese negotiation? The quick answer is NO. The complicated answer is Yes, No and No again.

Before we look at trends in Chinese negotiation going forward, let’s take a moment to examine the path that leads up to the present situation. (For more details, see this slideshow or these videos )

Guanxi can be somewhat over-simply defined as a network of counter-balancing connections and business relationships. The word translates as “relationship”, but is usually used to indicate a network of business connections who trade contacts, influence, and favors to further their mutual interests. It may appear social, but for many traditional Chinese businesspeople, it is all business.

Guanxi is not the same as corruption, though most instances of bribery and graft use the language and customs of guanxi – connections, gift-giving, non-contractual agreements, and special favors. Guanxi, however, serves many useful functions that regular (i.e.: non-elite and non-corrupt) Chinese managers and dealmakers appreciate. The main reason that guanxi will never disappear from the Chinese business environment is that very few Chinese want it to. A good network is a valuable asset, and the ability to make powerful connections is a useful skill that Chinese managers are proud of.

There are positive and negative aspects to guanxi, and Westerners tend to focus on the problems. While it’s understandable for the media to write about the lurid and criminal; and individuals to warn colleagues and subordinates about pitfalls in the Chinese business environment, Westerners tend to be too dismissive of guanxi and other Chinese business traditions – which leads us to draw the wrong conclusions and make mistakes when planning.

The bad and good of guanxi

Guanxi brings with it plenty of problems. At its worst, guanxi is a gateway for corruption and bribery. It justifies exclusion, cliquish behavior, nepotism , and cronyism. Just as bad, it can make Chinese deal making a convoluted and opaque process – where doors are closed and opportunities withheld to anyone who doesn’t know the right people. It can be elitist, nationalistic, racist, and restrictive. While other business cultures can have the same problems, often China’s obsession with connections and guanxi makes these undesirable elements more prevalent, intractable and institutionalized in the PRC than in the West.

Guanxi has plenty of positive and commendable aspects that Western negotiators should do their best to capitalize on. Guanxi is part of Chinese culture and tradition – not a recent development that can be dispensed with or turned off when a Westerner walks into the room. It is a well established aspect of Chinese business that good strategists and planners must incorporate into their thinking if they want to be successful in Chinese negotiation.

For those who know how to use it, guanxi serves a valuable networking function. Traditional Chinese managers who need a source, a service, or a bureaucratic approval will conduct orderly searches among their network of contacts to find the shortest, most efficient path to locate the right person. This often strikes Western managers as unprofessional and improper, but the networking aspect of guanxi can be quite effective. It is not going away, so experienced manages know that they are better off incorporating the practice into daily operations rather than forcing it underground. (RFQs and RFPs are common in coastal cities, but traditional Chinese managers are still shocked that anyone would work with a stranger if they didn’t have to.)

Guanxi is used as a form of due diligence. Financial audits and credit reports were always viewed somewhat suspiciously in Chinese business — and the global financial crisis of 2008 didn’t do much to build confidence. Traditional Chinese negotiators want to know who they are dealing with on a more personal level — they want to know about your character, your attitude towards risk, and your general level of maturity and sophistication. Westerners who treat relationship-building banquets and social events as unimportant nuisances are blowing important opportunities. This is no time for empty small-talk. Even if you aren’t conducting detailed negotiation, it is still a valuable chance to clarify your position and align goals.

Guanxi has a compliance function as well. Chinese businessmen have only recently come to appreciate the importance of branding, but they do value their own status — even if only among other members of their network. No one wants a reputation as dishonest or incompetent. Americans like to ask for references or third party audits, but Chinese want to know who you know. If you have no powerful or influential associates, then you come off as someone lacking power and influence yourself. Relationship-building in China means presenting yourself as a solid member of the business community who either has deep roots — or plans on developing them. A favorite Chinese negotiating tactic is outlasting an interloper and waiting for them to go away. The more solid and well-connected a partner appears, the more likely that the Chinese side will honor deal terms.

Good guanxi is a sign of skill, intelligence, and rectitude. Chinese business people see guanxi as a valuable skill and an important source of competitive advantage. A person with a broad network of powerful, important associates is deserving of respect – not just because of the influence they command, but also because the ability to develop such a network is itself an important skill. It indicates maturity, intelligence, and experience.

Westerners see guanxi as a close relative to corruption and fraud — and it most definitely can be. But there is another side to guanxi that offers real value to traditional Chinese businessmen – and to Westerners who know how to use it to their advantage.

Guanxi matters to your Chinese counterparty, so it matters to you. Guanxi is not going away, so you would be wise to understand how to make it work for you.

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2 Responses to "Is Guanxi on the Way Out of Chinese Negotiation? Part 1 of 2"

[...] Last week we looked at the positive and negative aspects of guanxi from the perspective of Chinese n…. The take-away is that while local Chinese may have their problems with the restrictive, unfair, and corrupt aspects of guanxi, it is a practice that is deeply imprinted on the Chinese businessman’s DNA and is unlikely to go away any time soon. It matters to Chinese negotiators – so it matters to you. [...]

[...] In fact, guanxi is the international negotiation version of the pneumatic nail gun. In the hands of the right person working with the right materials under specific circumstances, it can create a lasting bond. But if you mishandle a nail gun, it will ruin your day and wreak havoc on everything around you. In China there are nail guns everywhere. Just because you don’t know how to use them doesn’t mean you can ignore them, take them lightly – or hire someone to fix every problem you have with his own nail gun. In other words, just because guanxi and personal relations rarely help American negotiators in China doesn’t mean that you should ignore the importance or deny the existence of a significant cultural phenomenon. Guanxi is real, it’s not going away, and Chinese take it seriously. [...]